Blue-chip lenders the latest victims of the country's fiscal woes
JOHANNESBURG – South Africa's blue-chip lenders have become the latest victims of the country's economic and fiscal woes with the key banks index down nearly 18 percent in the past three months, wiping off billions of rand in the shares in the process.
Nedbank has plunged nearly 20 percent in the past 90 days while the country's biggest bank by assets Standard Bank has lost 16.71 percent.
FirstRand, the largest bank by market capitalisation, has fallen nearly 19 percent while Absa has eased more than 13 percent.
Capitec’s share price has plummeted more than 17 percent and Rand Merchant Bank over 20 percent.
Asief Mohamed, the chief investment officer of Aeon Asset Management, said the South African Bank sector was down nearly 18 percent off its 52 week high.
“The South African risk spread has widened in line with increasing fears of worsening sovereign credit quality. This has had a contagion effect on banks with higher credit losses expected,” Mohamed said. “The worsening position of Eskom is also not helping to improve credit quality.”
The government plans to make an extra R59 billion available to the embattled Eskom over the next two years to meet its obligation and maintain its going concern status.
The R59bn is part of the R230bn allocated to the utility over the next decade in the February Budget but would now have to be released early to keep the utility afloat. The move has drawn the ire of rating agencies.
Victor von Reiche, portfolio manager at Citadel, said there were overarching and related reasons for the weak performance of the banks index.
“Most of the pressure experienced over the past two weeks has, however, risen from increased concerns regarding South Africa’s fiscal position, exemplified by speculation over an eventual IMF bailout and a possible downgrade by Moody’s,” Von Reiche said.
“We’ve seen the rand and local bonds weakening as a result of these South Africa specific and external factors. Banks are intricately linked to the local economy and are therefore closely correlated to currency and bond movements, resulting in the weakness recently witnessed.”
The South African Reserve Bank has conducted a stress test on what a default by Eskom means for the financial sector and found that it would be able to withstand this.
Eskom’s operational challenges were also the main contributor to the shock 3.2 percent first quarter decline in gross domestic product, a development that Moody’s said is credit negative for South Africa’s government and the country's banks.
Moody’s yesterday in a research note said high wage bills constrain spending flexibility in Namibia and South Africa and that credit risks associated with lack of spending flexibility are most pronounced where it coincides with higher debt burdens and susceptibility to financing shocks.
“In South Africa, the lack of spending flexibility limits the government's ability to adjust other spending items to make room for additional support to Eskom (B2 negative), resulting in a larger fiscal deficit and higher debt burden,” Moody’s said.
Moody’s is the only remaining rating agency that still has the country’s sovereign debt above junk and is scheduled to pronounce on South Africa’s ratings in November.